Emerging Asian currencies edged higher on Tuesday, as China's latest monetary easing step helped underpin risky assets and as uncertainty over the pace of further US interest rate hikes tempered the dollar's momentum. China's central bank resumed its easing cycle on Monday, by cutting the reserve requirement ratio, or the amount of cash that banks must hold as reserves, by 50 basis points, taking the ratio to 17 percent for the biggest lenders.
Analyst said the move helped give a modest boost to risk sentiment and Asian currencies, even as business surveys showed a further deterioration in China's economy. "I think on the whole, the stimulus is coming in, at least monetary policy wise," said Leong Sook Mei, ASEAN head of global markets research for the Bank of Tokyo-Mitsubishi UFJ in Singapore.
"Of course the dollar can't really go up very much in this environment of the paring back of US rate hike expectations," Leong added. US data on Monday showed a drop in pending home sales in January and that Midwest factory activity contracted in February, tempering enthusiasm towards the world's largest economy. Against a basket of major currencies, the dollar last traded at 98.139. The dollar index was little changed for the week, taking a pause after having climbed 1.6 percent last week.
"It's becoming more difficult to justify the logic that only US assets will attract money," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
"At the same time, investors are unlikely to aggressively shift funds back toward emerging markets, since it is hard to expect that growth rates in emerging market countries will head higher," Okagawa said. The Indian rupee held firm, having rallied on Monday after Finance Minister Arun Jaitley said the government would stick to its fiscal deficit target for 2016/17, raising expectations the Reserve Bank of India (RBI) may cut interest rates before its next policy review in April.
"The budget with fiscal consolidation remaining on track is expected to prompt a policy rate cut. In addition, we could not rule out the chance of an unscheduled monetary policy review before the RBI's April meeting," Qi Gao, an emerging Asian currency strategist for Scotiabank in Hong Kong, said in a research note. "A combination of prudent fiscal policy and pro-growth monetary policy could attract portfolio investment inflows," he added.
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